Avoiding Excess Benefit Transactions in Nonprofits
Posted by Robert Torella on July 17, 2024
Excess benefit transactions pose significant risks to nonprofit organizations, including potential IRS penalties ranging from 25% to 200% of the benefit's value, and even revocation of tax-exempt status, leading to loss of donor and community support.
Understanding Private Inurement
Private inurement involves any payment or transfer of assets by a nonprofit that exceeds reasonable compensation for services provided or does not further the organization's tax-exempt purpose. This concept extends to “insiders” or “disqualified persons,” such as officers, directors, major donors, and those in positions of significant influence. Violations occur when transactions benefit these insiders.
Ensuring Reasonable Compensation
Payments to insiders, like salaries and wages, must be reasonable and align with the nonprofit's tax-exempt purpose. To safeguard against allegations of excess benefit transactions, formally document all payments to insiders and ensure board members understand their duty of care. This includes acting in good faith, prioritizing the organization’s best interests, and exercising appropriate diligence. Implementing a conflict-of-interest policy for board members to review and sign is a best practice.
The Importance of Appearance
Although state laws vary regarding loans to insiders, avoiding such transactions is generally prudent to prevent IRS scrutiny. It’s advisable to consult with professionals to ensure your organization remains compliant and avoids both actual and perceived excess benefit transactions.
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Bob has considerable expertise in auditing and accounting of exempt organizations, specifically educational institutions, arts and entertainment organizations, and other nonprofit organizations, as well as employee benefit plans, auto dealerships, and other commercial entities, where he manages and oversees the all services to these organizations. Additionally, he has significant experience in grant compliance, audits in accordance with Government Auditing Standards and the Uniform Guidance, financial reporting, and taxation of exempt organizations. Bob is a member of the Firm’s Accounting and Auditing Technical Committee and is the chairperson of the Financial Accounting Standards Board Subcommittee. He was named partner in 2024.